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Daily Newsletter, Monday, 10/29/2007

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Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Stocks Gain Despite Bubbling Crude

The major equity averages posted modest-gains to start the week despite the continued rise in oil prices, where December Crude Oil (cl07z) at the NYMEX traded as high as $93.70 before settling up $1.67, or +1.82% at $93.53.

Miners as depicted by the AMEX Gold Bugs Index ($HUI.X) 428.68 +1.92% were also strong on dollar weakness, as gold nears the $800.00 level.

Financials finished mixed after a modest gain late last week as traders position themselves ahead of the two day Fed meeting, which starts tomorrow.

NYSE and NASDAQ Composite Internals - Since 09/24/2007

Market internals at the big board had gainers outnumbering advancers by a 3-to-2 margin. Investors pushed 286 1, 2, and 3-lettered stock symbols to new 52-week highs, while 82 stocks fell to a new 52-week low.

NASDAQ internals were what I'd consider to be fractionally positive with advancing issues roughly equal to declining issues. While there are some energy stocks that trade on the NASDAQ, the number of new highs aren't as impressive among the 4 and 5-lettered stocks symbols the past couple of days.

Global Equity Index Benchmarks and Currencies

The U.S. Dollar Index (DXY) 76.83 has fallen an additional 1.58% since last Monday, and that decline finds the AMEX Gold Bugs Index ($HUI.X) and Gold itself recouping their 10/15 to 10/22 losses. Traders and investors continue their bantering as to the relationship between the greenback and oil prices, where uncertainty surrounds if oil's rise is causing the dollar to weaken, or the weakening of the dollar in anticipation of further Fed rate cuts simply exacerbates the rise in oil prices, where oil is prices in US$.

Odd-man out is gold, which certainly looks to be tied with the euro's strength vs. the US$.

Japan's Nikkei-225 ($NIKK) has seen a modest 1.58% bounce after its 10/15-10/22 as the US$ steadies against the yen.

Outside of that relationship, I still find it difficult to make too many ties between how currencies trade relative to key global equity benchmarks.

S&P 100 Index (OEX.X) (40 Heavyweights) - Cap Weighted Index

Other than some profit taking in Microsoft (NASDAQ:MSFT) $34.57 -1.31% after last week's bullish response to the software giants quarterly earnings report, buying among the top 40-weighted S&P 100 ($OEX) components helped to offset any MSFT weakness.

Look for institutional capital to be aggressive buyers of MSFT on any dips near $33.00 to $33.50, as they'll all want to show "Mr. Softy" on their books by year's-end.

One theme of weakness over the last 20-days sticks out as "banks," be it regional, or money center.

In this evening's wrap, we'll take a look at the S&P Bank Index (BIX.X) and Broker/Dealer Index (XBD.X).

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Zurich-based UBS AG (NYSE:UBS) $53.25 -1.07% said today that it expects to report a loss of 600 million Swiss francs ($515 million) to 800 million francs, but warned it could take further charges in the fourth quarter from its exposure to U.S. housing and mortgage markets. The Swiss banking group, which will report third-quarter earnings tomorrow, said the fourth quarter has started with good results from all units, but further deterioration in U.S. housing markets or rating downgrades for mortgage-related securities could lead to further write-downs.

While UBS is not a component of an major U.S. equity benchmarks, its exposure and comments regarding the housing and mortgage-related areas of the U.S. economy are closely followed.

Verizon (NYSE:VZ) $45.99 +0.85% did close at a new 52-week high. The telecom service provider, which is the 19th-most heavily weighted component in the price-weighted Dow Industrials ($INDU) 13,870 +0.46%, said Q3 net income fell 34% to $1.27 billion, or $0.44 a share, hurt by international taxes and costs of a spin-off of access lines. Adjusted earnings were $0.63 cents a share, which was a penny better than a survey of analysts by Thomson Financial, which produced an average estimate of $0.62 cents a share.

Positive guidance from the communications company regarding its strong wireless business and high-speed Internet customers, helped put a bid into the newtorkers with the Networking Index ($NWX.X) 306.70 +2.14% atop today's list of sector winners.

S&P Banking Index (BIX.X) - Daily Intervals

Some comments late last week out of Countrywide Financial (NYSE:CFC) $16.83 -2.71% and Merrill Lynch (NYSE:MER) $67.42 +2.01% took some pressure off the "super regional" and regional banks at the end of last week, but there was little follow-through today.

I would have to remain rather cautious the banks at this points, and today's high was notable relative to the BIX's 08/03/2007 low of 340.50. The inability to hold a move above that level would have to suggest "bank bulls" that may have thought they got the low in early August, aren't so certain.

Broker/Dealer Index (XBD.X) - Daily Intervals

Brokers are showing some sign of repair taking place among the financials. Goldman Sachs (NYSE:GS) $243.81 +3.34% closed at an all-time high again today after trading as low as $157.38 on August 16th!

Dow Transports (TRAN) - Daily Intervals

I wanted to quickly update traders on the Dow Transportation Average (TRAN) 4,844.51 -0.46%, and comments that I made in recent market wraps.

I should note that the TRAN components are NOT "heavyweights" in any major U.S. equity index (INDU, OEX, SPX, NDX/QQQQ), but what they say in the form of technicals is what "Dow Theory" monitors.

I'm not seeing any sign of bullishness at this point, but I am somewhat impressed that they've held together considering the following chart.

US Oil Fund (AMEX:USO) - Daily Intervals

Another short squeeze is underway in the energy complex, and after last week's "surprising" draw in crude oil inventories, bears are scrambling once again to cover positions when overhead supply in both the USO and futures are nonexistent.

The MOST dangerous short I continue to see is either oil the commodity, or gold the commodity, and for those that love to difficult trade of trying to pick a top at highs, where there is no overhead supply to keep things in check, the most dangerous place to try and short is in the FUTURES markets, especially when holding over the weekend, when RISK of a gap higher on Sunday evening's re-open could leave traders facing a HUGE GAP UP, in a highly LEVERAGED instrument.

I've pointed to two bars on the daily interval bar chart of the USO, where it has "spiked" higher intra-day, but CLOSES notably lower at a day's close.

Oil EQUITIES should LEAD a DECLINE in oil prices. If set on trying to "pick a top," do it with an OIL STOCK/EQUITY, but utilize a PUT OPTION, where the MOST YOU CAN LOSE is the amount of the OPTION!

Should oil prices ever abate, and energy equities decline, it would have to be my analysis that another GROUP of stocks pick up the slack.

S&P 500 Index ($SPX) - Daily Intervals

As you can see from my U.S. Market Watch and 20DyNet% changes, technology and energy stocks have been the primary drivers that have the S&P 500 Index ($SPX) closing above its trying-to-round lower 21-day SMA.

The rather broad Russell 2000 Index ($RUT) 821.72 +0.04% did test its 21-day SMA (826.39) in today's session, but traded more inline with what we saw in the S&P Banks Index (BIX.X), which was strength at the open, but a giveback of those gains towards the mid-point of today's session.
 

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Alcoa - AA - cls: 40.43 change: +1.08 stop: 36.95

AA helped lead the DJIA higher with a 2.7% gain and a breakout over the $40.00 level. We were suggesting a trigger to buy AA at $40.10 so the play is now open. Readers can choose to open positions here or look for another dip back toward $40.00, which should be new short-term support. our target is the $44.50-45.00 range. Our time frame is six to eight weeks. FYI: The Point & Figure chart for AA is bullish and points to a $53 target.

Picked on October 29 at $40.10
Change since picked: + 0.33
Earnings Date 10/09/07 (confirmed)
Average Daily Volume: 11.5 million

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Adobe - ADBE - close: 47.00 change: -0.00 stop: 44.85

The momentum in ADBE is starting to falter. Shares broke down under short-term technical support at the 10-dma and its bullish pattern of higher lows. ADBE managed to recover and close unchanged on the session but we wouldn't be surprised to see further weakness if the technical indicators are any sign. More conservative traders may want to take a little money off the table. We're not suggesting new positions at this time. Our target is the $49.50-50.00 range. The P&F chart is already bullish with a $51 target. Our time frame is about four weeks.

Picked on October 09 at $45.05
Change since picked: + 1.95
Earnings Date 12/17/07 (unconfirmed)
Average Daily Volume: 7.0 million

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Bristow Group - BRS - cls: 50.40 chg: +0.00 stop: 47.90

BRS broke out from its consolidation pattern on Monday. The stock gapped open higher at $50.71 and hit $51.60 intraday before paring its gains. The stock actually closed unchanged on the session. We were suggesting a trigger to open positions at $50.51 but the gap higher has given us a higher entry. The $50.00 level held as short-term support midday and readers could use another rebound from here as a new entry point. Our target is the $54.00-55.00 range, which is a little aggressive considering our time frame. BRS is due to report earnings on Monday, November 5th after the market's close. FYI: The Point & Figure chart is very bullish with a $60 target. This is an oil services stock.

Picked on October 29 at $50.71
Change since picked: - 0.31
Earnings Date 11/05/07 (confirmed)
Average Daily Volume: 210 thousand

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C S X Corp. - CSX - close: 44.72 change: -0.04 stop: 42.99

CSX spent the session trading sideways in a relatively narrow range after hitting $45.01 this morning. We do not see any changes from our weekend new play description. We're suggesting a trigger to buy CSX at $45.15. If triggered our target is the $49.50-50.00 range. Our time frame is six to eight weeks. FYI: The P&F chart points to a $61 target. More conservative traders may want to try a tighter stop loss near $43.50.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/16/07 (confirmed)
Average Daily Volume: 6.1 million

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Gerdau Sa ADS - GGB - close: 31.26 change: +0.89 stop: 27.90

GGB soared to another new all-time high with Monday's 2.9% gain. We remain bullish here but readers might want to wait for a dip back toward $30.00 before considering new bullish positions. We cannot find a confirmed earnings date for GGB but it normally reports in early November. We suspect that we still have a week to two weeks before the announcement, which we do not want to hold over. The lack of a confirmed report date does raise the risk on this play. Plus, there are several other steel-related companies reporting this week and their reports could influence trading in shares of GGB. An example would be U.S.Steel (NYSE:X) who reports on Tuesday morning. Our target is the $33.50-35.00 range.

Picked on October 28 at $30.37
Change since picked: + 0.89
Earnings Date 11/07/07 (unconfirmed)
Average Daily Volume: 2.3 million

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MIVA Inc. - MIVA - close: 3.25 change: -0.09 stop: 2.99

MIVA hit some minor resistance at $3.40 this morning and turned lower. Traders stepped in to buy the dip near $3.17. We want to remind readers that this is a high-risk, speculative play. You could buy this dip or wait for signs of a bounce first back above $3.30. We suspect that the bad news is already out so we're going to make an exception to our rule about holding over earnings. This time we plan to hold over the report in early to mid November. Our target is the $3.95-40.00 range.

Picked on October 28 at $ 3.34
Change since picked: - 0.09
Earnings Date 11/08/07 (unconfirmed)
Average Daily Volume: 252 thousand

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Systemax - SYX - close: 23.15 change: -0.24 stop: 21.59

SYX hit some profit taking on Monday after touching a new relative high at $24.19. The pull back to $23.00 may be a new bullish entry point but at this point we would want to wait for signs of a bounce, maybe over $23.25 or $23.40, before initiating new positions. We believe the stock can breakout past the $25 level. Our target is the $27.00-27.50 range. Our time frame is six to eight weeks. FYI: the P&F chart is very bullish with a $40 target.

Picked on October 28 at $23.39
Change since picked: - 0.24
Earnings Date 12/17/07 (unconfirmed)
Average Daily Volume: 348 thousand
 

Short Play Updates

Basic Energy - BAS - cls: 19.63 change: -0.36 stop: 20.85

Oil service stocks failed to rally on the strength in crude oil today. Meanwhile shares of BAS continued to sink. The stock confirmed Friday's breakdown under support at the $20.00 mark. Our suggested trigger to short the stock was at $19.75 so the play is now open. Our target is the $18.50-18.00 range. More conservative types could exit near the August lows around $18.60. The P&F chart is very bearish with a $9.00 target. We do not want to hold over the November 8th earnings report.

Picked on October 29 at $19.75
Change since picked: - 0.12
Earnings Date 11/08/07 (confirmed)
Average Daily Volume: 406 thousand

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Gap Inc. - GPS - cls: 18.67 change: +0.06 stop: 19.05

We remain defensive on GPS. The stock didn't move much today and its sideways consolidation narrowed significantly around noon today. The only news on GPS today was its announced that it was severing its relationship with a clothing supplier in India after discovering the company used and abused its child labor. We would wait for a drop under $18.25 or $18.00 before considering new shorts on GPS. Our target is the $16.00-15.50 range.

Picked on October 21 at $17.49 *gap down
Change since picked: + 1.18
Earnings Date 11/21/07 (unconfirmed)
Average Daily Volume: 8.7 million

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JDS Uniphase - JDSU - cls: 15.16 change: +0.43 stop: 15.55

JDSU produced a relatively big bounce with a 2.9% gain and a breakout back above its 200-dma and the $15.00 level. This is a relatively bullish move and should be shorts on the defensive. We only have a couple of days left so we're not suggesting new positions. We will plan to exit on Wednesday at the closing bell to avoid the earnings announcement. Our target is the $13.75-13.50 zone.

Picked on October 21 at $15.23
Change since picked: - 0.07
Earnings Date 10/31/07 (confirmed)
Average Daily Volume: 3.8 million

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NVE Corp. - NVEC - cls: 28.80 change: -0.21 stop: 31.51

We do not see any changes from our weekend comments on NVEC. The stock continues to slip albeit very slowly. More conservative traders might want to tighten their stops a bit. Our target is the $25.50-25.00 range. The bearish head-and-shoulders pattern in the charts is forecasting a $20-18 target. FYI: We would consider this an aggressive play simply for the fact that NVEC's average daily volume is very low! However, the real risk is a short squeeze. The latest data puts short interest at more than 30% of NVEC's very, very small 4.2-million share float. That represents a big risk for a short squeeze.

Picked on October 22 at $29.30 *gap down entry
Change since picked: - 0.50
Earnings Date 10/17/07 (confirmed)
Average Daily Volume: 76 thousand
 

Closed Long Plays

Heidrick & Struggles - HSII - cls: 39.71 chg: -0.72 stop: 39.74

It was our plan to exit tonight at Monday's closing bell to avoid holding over HSII's earnings report due out tomorrow. Unfortunately, the stock displayed relative weakness and hit our stop loss at $39.74, closing the play.

Picked on October 14 at $40.20
Change since picked: - 0.49
Earnings Date 10/30/07 (confirmed)
Average Daily Volume: 353 thousand

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Sirius Satellite Radio - SIRI- cls: 3.61 change: +0.03 stop: 3.49

Time has run for us with the SIRI play. The company is due to report earnings tomorrow morning. We didn't want to hold over the announcement so it was our plan to exit tonight at the closing bell.

Picked on September 30 at $ 3.49
Change since picked: + 0.14
Earnings Date 10/30/07 (confirmed)
Average Daily Volume: 35.2 million
 

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.

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